Construction accounting differs from general accounting. In addition to the standard debits, credits, and financial statements, contractors need job-costing functionality to account for project-centered production. They also need to be able to track long-term contracts paid over time and deal with unique aspects of revenue recognition and retainage practices.
Accounts Receivable
When you’re running a construction company, it’s essential to remember that the bookkeeping process is very different from other industries. A significant difference is that commissioned contractors get paid upon completing their work, while a typical retail or manufacturing business gets paid upfront for goods and services sold to customers.
It makes tracking, reporting, revenue recognition, and contractor collection strategies much more complex than other brick-and-mortar businesses. In addition, costs associated with construction projects can fluctuate more than other business types. For example, a contractor may need to pay taxes per contract. A good bookkeeper must understand the intricacies of recording these expenses accurately.
Additionally, construction jobs can last for years. It requires a solid invoicing system that can track the progression of the job and account for things like retainage. Ensuring timely invoices are timely and sent to the right person is vital.
Accounts Payable
Contractors often have to rent equipment, pay for supplies, and other expenses that vary from job to job. By tracking each expense on a project-by-project basis, construction companies can understand which jobs cost them more than they supply.
Accounts payable is the money a company owes to creditors and suppliers. The entries are booked on the balance sheet under current liabilities.
In contrast to accounts receivable, the information on a company’s accounts payable is not automatically generated by each invoice. A company’s total accounts payable are separate from its trade payables, representing inventory items like fabric and toner for a quilting business. Bookkeeping for construction companies can help manage a company’s accounts payable and pay taxes on an estimated quarterly basis, which can reduce tax bills at the end of the year. It can also handle construction revenue recognition methods, such as fixed price, time and materials, and unit pricing contracts.
General Ledger
As a business owner, you can’t run your company without a general ledger (GL). The GL is the master notebook that documents every accounting transaction. Financial statements such as the balance sheet, income statement, and cash flow statement are all based on it.
The GL contains a chart of accounts and a list of accounts for categories such as assets, liabilities, revenue, and expenses. Whenever a financial transaction occurs, it gets documented in a journal entry in a sub-ledger and then summarized in the GL. Each transaction is recorded as a debit in one account and a credit in another, so the numbers must always balance.
Regular account reconciliation and balancing ensure accuracy and help maintain the fundamental accounting equation of assets equaling liabilities plus equity. During this process, accountants review the accounts in the GL against primary documents like bank statements, tax documents, and invoices to ensure all entries are accurate. This step is called a trial balance.
Payroll
Time is money in every industry, but it’s especially critical for construction. With client expectations, deadlines, and a long-term view of projects in mind, keeping accurate time records is imperative for construction bookkeeping.
Payroll is also a unique aspect of the construction accounting process. Builders must juggle varying pay rates, union terms, government contract rules, and other factors to handle their payroll correctly.
As with all types of business, accounting records need to be in place so that companies can track profits and losses and forecast future expenses. It includes balance sheets, which provide a snapshot of the company’s assets and liabilities for lending purposes and financial analysis. Then, there are income statements, which report the revenue and expenses accrued during a specific period. These are used for profit and loss calculations, tax reporting, and cash flow forecasting. Finally, job costing records help contractors determine labor, material, overhead, and other project costs.